April 2009 Archives

We've got a new podcast up: Steve Cyr, legendary Las Vegas superhost, shooting from the hip on his career, high rollers, and the Hard Rock.  It's great stuff, and a dynamic, behind-the-scenes look at Las Vegas.

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We've got a new page up--it's a quick guide to which of the 20 biggest metropolitan areas in the US have casinos, and what kind of casinos they have:
http://gaming.unlv.edu/media/top_20.pdf

Jackpot for a Casino Thanks to Great Lawyering

 

            Legal gambling can be one of most profitable businesses around.

            Take for example Penn National Gaming.  The company owns four Argosy and four Hollywood casinos; manages the 200,000 square foot Rama Casino in Canada; owns three other casinos, including the Empress Joliet; operates telephone and internet wagering on races, and owns nearly a dozen OTB facilities and racetracks, some with slot machines, including Penn National Race Course.  All this legal gaming brings in revenue of about $1.5 billion a year.                                                 

            But even casinos have expenses.  So, Penn Gaming's net income is $160 million.

            Making a profit of more than 10% on sales is not bad.

            But Penn Gaming just received $700 million in cash.  And the only thing it cost was some lawyers' fees.

            By the time you read this, Penn Gaming will have received another $775 million, in what effectively is an interest free loan.

            How did Penn Gaming get so much money, at virtually no cost?  For doing nothing.  Specifically, for not being bought.

            Back in the heady days of corporate takeovers, in June 2007, some private equity firms and large banks worked out a deal to buy the publicly traded Penn Gaming for about $6 billion.  During the year it took to get the many government approvals, the Bush Recession erupted.  Gas is now more than $4.00 a gallon, millions of people fear unemployment and foreclosure, and banks are reluctant to lend money to anybody.  Casinos, tracks, and the stocks of the gaming companies that own them, have been hard-hit.

            Although the investment companies seemed willing to complete the deal, their banks refused to come up with the money.  Things really are as bad as they seem in the credit market.  The banks, astonishingly short-sighted, are paying hundreds of millions of dollars, to not buy a company that they will undoubtedly want to help buy in a few years.

            One of the main reasons the buyers had to pay so much to get out of the deal was the great work Penn Gaming's lawyers did during the negotiations.

            Lawyers have to think about the bad and the ugly as well as the good.  A lawyer should always ask, "What if things don't work out?"  Partnership law, for example, expressly states how losses will be divvied up, because people going into business together often think only about how they are going to split the profits. 

            Penn Gaming's lawyers thought the deal would go through, but, just in case, they wrote in some great protections for the company.

            First, they put in a $200 million kill fee.  If the buyers tried to back out, they would have to fork over much more than Penn Gaming makes in a year.

            The buyout agreement also had provisions dealing with the possibility of the banks having trouble raising the money.  All of these protected Penn Gaming, including the express right to obtain an injunction, a court order requiring the buyers to perform.

            Penn Gaming's legal position was so strong that when the buyers tried to renegotiate at a lower price, Penn's executives refused to budge.  To get out of the deal, the buyers had to agree to give $700 million in cash and another $775 million in what amounts to an interest-free loan.

            This puts Penn Gaming into a great position when either the price of gas comes down or Americans get use to paying what Europeans have paid for years.  With so much cash and property, Penn Gaming will be sold for many billions, when investment funds again become available.

            In the meantime, Penn Gaming and its shareholder have to thank the company's lawyers for getting it a billion and a half dollars in cash for NOT being sold.

                                                                          END

#08-13  © Copyright 2009. Professor I Nelson Rose is recognized as one of the world's leading experts on gambling law and is a consultant and expert witness for players, governments and industry.  His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.

We've got a new podcast up: Nicholas Tosney's Gaming Research Colloquium Series talk, "Crime, Commercialization, and Casinos: Legacies of 18th Century Gambling." This is a good one!


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Gambling and the Law®:

Of Course It's A Depression

 

"Buy when there is blood in the streets, even if the blood is your own."

            Baron Nathan Rothschild

           

            There is a generally accepted definition of an economic recession - a decline in gross domestic product for two consecutive quarters.  But people don't agree on what is a depression until years after the fact.

            There is a difference, like the distinction between neurosis and psychosis.  A neurotic may have problems, even severe, distressing ones.  But a psychotic has at least temporarily lost touch with reality.

            The legal gaming industry is facing a psychotic global economy.

            Take, for example, Penn National Gaming.  In mid-2008, Penn Gaming was in the final stages of being acquired, when banks decided to cut off all financing for corporate takeovers.  But Penn Gaming's lawyers had done a great job writing in protections.  The banks panicked, and gave Penn Gaming $1.475 billion to not buy the company.

            The stock market reacted by driving the price of Penn Gaming's common shares down from the mid-$40s to $11.82.   With about 90 million shares outstanding, this gave the company a market capitalization of $1 billion: a strange valuation for a company making money, with little debt and a treasure chest of more than $1.4 billion in cash.

            We don't yet have many Bushvilles, like the homeless's shanty towns named Hoovervilles, after the last American President whose incompetence led to a depression.  But we do have literally millions of homes in foreclosures, tens of millions of people without work, and charity food banks running out of basic necessities.

            Unlike a recession, a depression is worldwide.  In January of this year, the Bank of England cut its interest rate to 1.5%, the lowest rate in its 315 year history.  The situation was even worse in the U.S., where the yield on three-month treasury bills actually went negative:  In December 2008, investors were willing to pay the federal government to hold their money, rather than risk putting it in banks.

            Economic depressions have immediate impacts on gaming law.  I have had more than one large U.S. investor hire me to advise them about bankruptcy procedures - in Macau.  Gaming companies are so international that bond-holders of American casino companies want to know about loans secured by property in Asia.

            A depression is marked by deflation.  Sellers become desperate; prices drop below cost.  Casino hotel rooms in Las Vegas are now going for $22.00 a day - free, for local residents.

            In a depression, virtually all business dries up.  Atlantic City casino revenue fell 18.7% in December 2008; Las Vegas Strip dropped 23%.  In fact, by every measure, this is the worst downturn since gaming was made legal in Nevada in 1931:  average room rates, visitor volume, convention attendance and total revenue have plummeted.

            Whether or not gaming ever was recession proof is somewhat irrelevant.  In a depression nearly everyone loses.  Plus, a company that makes a majority of its revenue from non-gaming sources, such as expensive restaurants, designer shops and overpriced Cirque du Soliel shows, is more susceptible to cutbacks in disposable income.

            Many casino companies were hit with dual disasters.  They were involved in multi-billion dollar expansions and corporate takeovers right when business dried up and the credit markets froze.  Some of those loans require periodic payments, minimum cash flows and high equity to debt ratios.

            As with the last depression, stock markets crashing have made things far worse.  Every gaming company has been hit.  The common stock of MGM Mirage dropped 94% over the last year, and the Las Vegas Sands was worse - it fell 97%.

            Trump Entertainment forced out the Donald immediately before declaring bankruptcy.  Herbst Gaming, Greektown Holdings, Legends Gaming, Magna Entertainment, Progressive Gaming and Tropicana Entertainment have also filed.  Station Casinos, Empire Resorts, UTGR Inc., Majestic HoldCo., and even MGM is tottering (pushed by its partner, Dubai World) and Harrah's Entertainment is trying to swap up to $2.8 billion in new notes due in 2018 for debt coming due next year.

            Economic depressions can cause industries to topple like dominoes.  Casinos aren't buying as many new slot machines, so manufacturers don't need as many parts from their various suppliers.  This hurts not only the manufacturers and suppliers, but the truck drivers who deliver the goods.

            Gaming companies are cutting back on service, even to high-rollers, and laying off employees.  The few with cash or available credit, like Penn Gaming, are buying back their stock or looking to pick up brand name casinos at bargain prices.  The rest are trying to survive.

            All segments of the industry are looking for ways to save money.  One of the most interesting, legally, are gaming tribes reexamining their compacts.  The most dramatic example was the startling announcement from Sycuan, near San Diego, that it would forego both building a second casino and expanding its 2,000 slot machines to 7,500.  Instead, the tribe will be putting in Class II machines.  The primary reason, besides business being slow and money for expansion being hard to get, is that the tribe had agreed to give the state of California 25% of its slot machine revenue, but nothing on its Class II devices.

            The good news is that some credit is still available, at least for deals that are a sure thing.  Lakes Entertainment had no trouble getting financing to buy the first 2,000 slot machines, of potentially 7,500, for the Red Hawk Casino it opened near Sacramento, California in December 2008.

            For governments, operators and entrepreneurs, the picture is mixed.             Every level of government is looking to find ways of balancing their budgets.  Gambling is seen as a painless tax.  Unfortunately, this means that politicians' first reaction is to raise taxes. 

            On the other hand, depressions call for desperate measures.  New Jersey may be the only jurisdiction in North America to ever roll back a smoking ban - for Atlantic City casinos.

            I have been hired by government officials in two states that are looking at major expansions of legal gambling. 

            In one case, I was retained to recommend the tax rate.  I told them it is vital that the tax be significantly below the psychologically devastating barrier of 50%, if private industry is going to invest millions of dollars in the expansion. 

            In the other state, I analyzed and gave my recommendations on legal issues surrounding the introduction of slot machines and other casino games.

            It also appears likely that intra-state Internet poker will come to California.  The state is desperate for tax revenue, and a bill, with many co-sponsors, will be introduced in the next few weeks.

            Even the U.S. federal government is backing off of its opposition to Internet gaming.  Congress, led by Harry Reid, Majority Leader of the U.S. Senate and Senator from Nevada, and Barney Frank, a powerful member of the House who believes the federal government should not be telling people what to do in their own homes, will again push to amend the Unlawful Internet Gambling Enforcement Act.

            Just as soon as they get us out of this second Great Depression.

END

© Copyright 2009.  Professor I Nelson Rose is recognized as one of the world's leading authorities on gambling law and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law (1^st & 2^nd editions) and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.

Gambling and the Law®:

Proving Poker is a Game of Skill

 

            How can we make poker legal?

            The cleanest way is to get a statute passed through the state legislature.

            In my book, Gambling And The Law, I show how California became the draw poker capital of the world because the state enacted laws in the 19th century that outlawed specific games, like 21 and faro, but left draw poker off the list.

            Of course, there still can be problems.  When Florida lawmakers authorized commercial cardrooms, they initially put a ridiculous limit of $10 on the size of pots.  And questions arose over what games qualify.  I testified as an expert witness that one innovation, essentially a game where players get two cards and try to get closer to 21 without going over, was not poker.

            Politically it has proven nearly impossible to get a poker bill through both houses of a state legislature and be signed by the governor.  At the very least, the pro-poker faction would have to spend enormous amounts of time and money lobbying local lawmakers.

            An easier route is litigation.  If the highest court of a state declares that playing poker for money is legal, then it is.  Even the U.S. Supreme Court can't overrule that decision, although the state legislature could put on restrictions.

            There are presently a couple of cases working their way through court systems in the United States, and a few more than that in Europe.  These aren't necessarily the perfect test cases, because lawyers often have to take the case their client has, rather than the one they would wish for.

            But the stakes are so great that somebody is going to put together the right case.  Here's what they should do:

1)        Put together a team of lawyers and experts in advance, so that a test case will have the right combination of laws and facts.

2)        Choose a state with the right laws.  The goal is to have a trial showing that poker is a game of skill and therefore legal.  The statute should clearly state that gambling is limited to games that are predominantly chance.  And there should be prior published case decisions that can be used.  The California Supreme Court, for example, declared that the card game of bridge is predominantly skill.  So it would only be necessary to prove that poker has as much skill as bridge.

3)        Use poker tournaments as the test case.  Courts that have ruled that  poker is predominantly chance have focused on the possibility that an amateur could be dealt a hand better than a professional.  So eliminate the possibility of winning on a single hand.

4)        File an action for a declaratory judgment - do not get arrested.  The best you can get once a case is in criminal court is a "not guilty."

5)        Get expert poker players to testify that most hands are not called, to show that it is not just who is dealt the best hand.

6)        Have experts run tests that have worked in other cases.  For example, games of skill always have a learning curve, and professionals beat amateurs in the long run.

7)        Be creative and prepared.  Courts have looked at how many books have been written on bridge (concluding it's a game of skill), and others have emphasized that the general public thinks lotteries are predominantly chance.  So lists should be made showing there are now more books for poker players than for bridge players.  And public opinion polls should be taken that prove the general public feels poker is a game of skill.

                                                                          END

#08-6  © Copyright 2009.  Professor I Nelson Rose is recognized as one of the world's leading experts on gambling law.  Gambling and the Law® is a registered trademark of Professor I Nelson Rose.  His latest books, Internet Gaming Law (1^st & 2^nd editions) and Gaming Law: Cases and Materials, are available through his website,  www.GamblingAndTheLaw.com.